Outlook for the Week of September 23-27

Key points to watch out for:

• Swiss National Bank expected to ease rates for a third time; reduction could be 50 basis points
• RBA will not raise rates but may be less hawkish as CPI falls
• After the Fed’s inaugural cut, eyes turn to inflation as measured by the PCE index
• September PMI indices in the euro zone’s crosshairs

SNB to Continue Cutting Interest Rates Due to Franc Strength

The Swiss National Bank (SNB) is the latest major central bank to announce its September policy decision. Like with the Federal Reserve, uncertainty remains about the size of the rate cut.

Investors estimate a 60% chance of a 25 basis point rate cut, with the remaining odds favoring a 50 basis point cut. Estimates of a larger cut have gained traction since early August when the Swiss franc soared against both the U.S. dollar and the euro.

SNB President Thomas Jordan will chair his last meeting on Thursday, September 26, before stepping down at the end of the month. He has expressed dissatisfaction with the franc’s strength, amid calls from Swiss exporters for the central bank to take further action to halt the franc’s appreciation.

The franc started the year lower after reaching nine-year highs against the dollar and euro in December. However, it resumed its upward trend in May and erased its earlier losses.

This has helped to reduce inflation in Switzerland, with the headline CPI falling to 1.1% year-on-year in August. However, beneath the surface, the outlook is less optimistic, as the CPI for services has been gradually rising this year. Additionally, GDP data does not indicate a severe situation for manufacturers.

That said, despite complaints about the strengthening of the franc, the case for a 50 basis point reduction is not very convincing. Furthermore, the SNB has already lowered financing costs twice in 2024, totaling 50 basis points, and a double cut would nearly exhaust its options, as the policy rate is currently at 1.25%.

However, a 50 basis point cut on Thursday would send a clear signal to traders, potentially triggering a franc sell-off and providing short-term relief to the export industry.

Australia No Rate Cut

Before the SNB meeting, it will be time for the Reserve Bank of Australia, which will announce its decision on Tuesday, September 24. Although inflation in Australia has begun to decline, reducing pressure on the RBA to raise interest rates further, a rate cut seems distant for now.

August’s monthly CPI will be released on Wednesday, September 24, so policymakers will not necessarily have access to the most recent data. Even if CPI falls further, having dropped to 3.5% year-over-year in July, it is unlikely the RBA will discuss a rate cut at this time.

However, policymakers are likely to be less concerned about inflation risks, though any significant changes could pressure the Australian dollar. All in all, it is unlikely to generate much of a turnaround before the November meeting, when economic estimates will be updated. Even so, markets have anticipated events, pricing in a 70% chance of a modest 25 basis point cut by December, meaning the Australian dollar’s decline could be limited.

Dollar Looking for Support in Underlying CPI

The Federal Reserve surprised markets by cutting rates by 50 basis points, more than expected at its September meeting, though policymakers have yet to claim victory over inflation. While starting the easing cycle with a larger cut can be seen as moderate, Fed policymakers do not expect significant additional reductions, with 25 basis point cuts more likely based on the latest dot plot.

This seems to have temporarily stabilized the U.S. dollar, as the sharp summer sell-off preceding the September decision has allowed the market to take a breather. On the other hand, investors will be looking for new signals regarding inflation that could serve to reinforce the moderate estimates.

On Friday, September 27, the PCE inflation measures will be released, along with personal income and consumption figures. In July, headline PCE held steady at 2.5%, while core PCE remained at 2.6%. Both figures appear to be above the Fed’s 2% target. However, looking at the 6-month annualized figures, July showed a sharp drop, indicating that if PCE indicators continue to decline in the following months, it could justify further rate cuts. This could even have influenced the Fed’s decision to lower rates by 50 basis points instead of 25 basis points.

The moderation in consumer spending serves to further support the Fed’s action. Personal spending is estimated to increase by 0.3% month-over-month in August, after rising by 0.5% in July. Personal income is expected to increase by 0.4% month-over-month.

Ahead of Friday’s data, S&P Global’s preliminary September PMIs will be released on Monday, September 23. Although Chairman Jerome Powell told reporters at his post-meeting press conference that he does not see high risks of a slowdown, any sign of a slowdown in PMIs could be a negative for the dollar.

On Tuesday, September 24, the September consumer confidence index may draw attention. Investors will also be watching several housing sector indicators, including new home sales on Wednesday, September 25. Also key will be the latest durable goods orders and the final GDP estimate for the second quarter on Thursday, September 26.

Eurozone PMIs in Focus After ECB Rate Cut

The European Central Bank cut interest rates for the second time this year in September, although it gave little indication of the pace of further easing. After a small rebound during the spring, the eurozone economy seems to be showing signs of losing steam again. The biggest source of weakness is coming from the bloc’s largest economy, Germany, although growth in the rest of the eurozone is not as anemic.

The positive news is that inflation is back under control, so the ECB appears to be in a position to react under a further deterioration in growth estimates. In August, the composite PMI rose, thanks mostly to a rebound in services, but the manufacturing PMI remained in the contraction zone.

As long as the services sector continues to underpin the overall economy, the ECB is likely to maintain a cautious stance until it is more confident that inflation is under full control. Therefore, the euro may not react much to the data on Monday, September 23 unless there is a negative surprise.

On Tuesday, September 24, Germany’s Ifo business climate index will be released.

Will UK PMIs Continue to Outperform?

Purchasing managers’ indices will become the main benchmark in the UK this week. The Bank of England, like the ECB, has refrained from committing to a specific easing path beforehand, though a 5 basis point cut in November is highly likely after policymakers remained unchanged in September.

All three UK PMI indices rose for the second month in a row in August, highlighting the improving economic outlook for the year. A further improvement in September would reduce the urgency for the Bank of England to accelerate the pace of rate cuts, likely boosting sterling.

Japanese Data Could Be Key for Yen Bulls

In Japan, purchasing managers’ indices are first on the agenda for Tuesday, September 24, ahead of key economic figures later in the week. Tokyo region CPI figures will come onto investors’ radar on Friday, September 27.

Markets are undecided on whether the Bank of Japan will raise interest rates again this year, against a backdrop of choppy economic performance and signs that inflation pressures are no longer as pronounced.

However, if PMI indices indicate that the economy continues the recovery started in the second quarter and there is another rebound in Tokyo’s CPI, the yen could resume its upward trend, which paused after the dollar’s sharp rebound following the Federal Reserve meeting.